Welcome to the new Becker-Posner Blog, maintained by the University of Chicago Law School.

09/26/2011

Government Workers and Fiscal Problems-Becker

Posner’s results are consistent with findings of little connection among the richer countries between their per capita incomes and the share of incomes spent by the government. Unfortunately, causation is hard to determine from such regressions. For example, as Scandinavian countries got richer, they raised government employment, partly by taking over much of the child-care services traditionally supplied by families. This helps explain why women in Scandinavia are much more likely than men to work for the government. A further problem with using government employment as a measure of government’s impact on an economy is that many regulatory agencies, such as the EPA (Environmental Protection Agency), the Fed and other central banks, and labor departments often have large effects on an economy through regulations that require few employees.

Public employees in Greece, Italy, in state and local governments of the United States, and government workers elsewhere are in the news in recent months not so much because of links to productivity, but rather because of connections to fiscal difficulties. Private companies typically adjust to financial problems partly by reducing employment and earnings of their employees, although such adjustments are harder in countries with strong unions and stringent labor protection legislation.

Both employment and wage adjustments are much harder for governments in difficult fiscal situations. Many of their employees are protected from being laid off by union contracts and civil service rights. It is also usually extremely difficult to cut their earnings, again partly due to restrictions imposed by unions and government rules. Government workers also take many of their benefits in the form of early retirements, and generous health benefits and incomes after retirement. These inflate current government spending when many past employees are receiving retirement benefits. In addition, as Posner indicates, votes of government employees can influence election outcomes if they are aroused by what they perceive to be unfair treatment from an incumbent political party.

Government workers in countries like Greece and Italy frequently retire in their fifties after only 20 or 25 years of government employment, while private sector employees are more likely to work into their sixties. Yet, even though they have generous retirement benefits as well as early retirements, their salaries are on a par with or exceed those of comparable private sector workers. This explains not only why lay off rates are low among government workers, but also why quit rates are lower than in the private sector. Why quit a government job if one is likely to earn less, and have less generous benefits, when working for private employers?

These benefits of government employment may be tolerable, and also extremely difficult to reduce, when economies are growing robustly, and government tax receipts are in balance with government spending. But they become a serious problem when tax receipts fall in a recession, and governments begin to run sizable deficits, and have problems funding their domestic, and especially their foreign, debt. Governments then come under pressure to cut spending, including spending on employees. Yet this adjustment is hard when government workers make up a sizable fraction of all workers-their share is over 20% in Greece- and when many government employees have tenure, fixed wages, and generous retirement benefits.

The state of California hired many employees and paid them well while times were good during most of the period from 1990-2007. Then the Great Recession led to huge holes in the state’s budget, which in turn forced confrontations with teachers and other unions as California tries to bring its bloated spending in line with sharply reduced revenues. A liberal Democratic recently elected mayor of Chicago, Rahm Emmanuel, has been staring down the teachers union (and other government unions) as he tries to get teachers and other government employes to work longer hours as he confronts a very serious budget deficit.

Greece’s problems are well chronicled: it borrowed heavily from French, German, and other banks during the good times of the early 2000s when its government ran sizable (although disguised) deficits. Greece is now under pressure to cut government spending during what will be a prolonged austerity period as it adjusts to the new economic realities. The government’s overpaying of employees is not the only problem it faces, but this is surely a significant one.

I have no doubt that for various reasons government employees are on average less efficient than private sector workers doing comparable work. Yet since many other variables are also important I am not surprised that correlations are weak between the share of workers employed by the government and income per capita, or even with the growth in per capita incomes. Nevertheless, overpaid and underperforming government employees are a drag on productivity, and especially on fiscal outlooks when economies are weaker. This helps explain why many state and local governments of the US, and governments in countries like Greece, are encountering serious obstacles to improving their fiscal houses as they respond to the Great Recession.

Becker points out that "as Scandinavian countries got richer, they raised government employment, partly by taking over much of the child-care services traditionally supplied by families." This is an example of how when a nation becomes more efficient and wealthy it can afford to have or want to have more government employment.

The feedback between the two phenomenon (government employment and per capital GDP) makes drawing meaningful conclusions from linear regression dubious in this case. Linear regression in the social sciences is frequently problematic.

Take the case of economist Steven Levitt's (also of the University of Chicago) published claims of how abortion on demand has allegedly decreased per capital crime rate; it was a claim that made him a minority celebrity. His informal economic analysis was superficially sound (but so were analyses supporting opposing claims like that of economist John Lott). However, the regression analysis that Levitt relied on to demonstrate his claim turned out to be badly flawed, and the argument was never satisfactorily repaired despite his best efforts.

The statistics were never able to truly vindicate Levitt's claim in spite of how it was seemingly common sense to argue that fewer unwanted babies generally meant less criminals. But what if the statistics had contradicted (some believe that it did) Levitt's claim? The statistical analysis would probably be ignored by those sympathetic to Levitt's claim (Levitt in particular) and embraced by those who found it unseemly (like John Lott).

Mitchel..... yeah, all sorts of things could be attached to the stats about child care. One...... would be that of the child care spurring more wealth and efficiency. In a small family society as the Scandies.... perhaps it's more efficient for a child care facility to care for several and free up the mom (or dad) for career employment. As kids don't come with an owner's manual, and early Pre-school education seems to provide long lasting benefits, we could speculate that spending much of the day with other kids, and those of professional training and standards, may be better than the "do it yourself" method.

Difficult, as you point out to say, as coincidence is not congruent with causation.

As for John Lott........ I've encountered him primarily with greatly flawed flacking for the NRA gun lobby set and count him as something of a coin-operated "economist" of close to zero credibility.

"I have no doubt that for various reasons government employees are on average less efficient than private sector workers doing comparable work."

............ I wonder instead. Work measurement it seems we agree is difficult as few government employees produce or sell widgets. While many private companies appear to be very efficient, there are lots of others with poorly trained employees working in under-capitalized or just neglected facilities and due to low pay, no bennies and no retirement program, don't stick around long enough to excel or become managers with years of experience behind them.

By contrast most government facilities are well funded, have a professional or at least craftsman level employee who tends to make a career of it, often for the fringe benefits and retirements. Also, while, perhaps, a case can be made that some are paid marginally more than their private sector counterpart --- if such exist? (there being few private sector jobs as dangerous as being a policeman or fireman) but public sector wages top out below $200,000 while similar admin jobs in the private sector can and do run into the tens of millions.

Robert Gates quipped the other night that his daughter managing three employees earned much more than he did while managing the largest and most complex organization on earth........ our three million troop military and it's tens of thousands of contractors.

"Yet since many other variables are also important I am not surprised that correlations are weak between the share of workers employed by the government and income per capita, or even with the growth in per capita incomes."

........ Yes! IF the public sector, including the overseers and umpires are doing a good job, along with teachers, police, firemen and others, then the nature of the playing field for the profit minded private sector would seem to be greatly enhanced.

"Nevertheless, overpaid and underperforming government employees are a drag on productivity, and especially on fiscal outlooks when economies are weaker."

.......... Indeed! and as the gleanings of top management having soared from 30 times working folk's pay to over 400 times would seem to indicate "overpaid and underperforming" private sector employees are a drag on productivity, and (as wage cutbacks/and or "performance bonuese" seem not to fall, regardless) especially on fiscal outlooks when economies are weaker.

It does seem as though it's the smallest of small biz where the sole or family proprietors take a hit in recession, while those working for a wage lose their entire employment.

Taking a look at the first graph it seems the overpaid something or anothers are in the, well above, $250,000 strata....... but looking over the 2nd graph it's difficult to see where the "overpaids" of working class wages could be hiding.

My experience is that some employees in the public sector and in the private sector are helpful and efficient and some are not but overall in both sectors the culture of helpfulness and efficiency is diminishing. Life in the US is getting difficult and unpleasant economic measures aside.

It might be instructive in this discussion to consider some alternative GDP definitions which takes into account depreciation of natural resources as well as socially and culturally negative economic activity such as building and maintaining prisons and mental health expenses (or the lack thereof. That would probably change the employee/GDP ratio greatly and probably in the direction of less efficiency.

Jim -- Great! "the depreciation of natural resources!" Ha! living here in an oil and other mineral extraction state we all hear "developers" "producers" and the like with most Alaskans favoring the profits and royalties of every bbl brought to market.

I remember oil Sheik Yamani (Harvard? I think) of SA remarking on SA becoming an irrelevant nation of sand dunes once it was pumped dry during the 70's "oil crisis" that produced no significant, long term conservation.

Mostly we account for oil and other resources in place at Zero, and until the recent price gouging the price closely reflected extraction costs. Mebbe..... contrary to my strong belief of a manipulated market, the Haha! recent "price discovery" of oil now reflects a portion of its NON-renewable value? If so....... as the "new value" produces far more profit to the extractors, it sends the wrong message. Better, it would seem is increased taxes reflecting the non-renewable nature of fossil fuels that would dampen demand w/o overly enriching the extractors.

But, however attained, the higher prices of non-renewables does help in the equation between "more costly" but sustainable wind, solar, geo et al.

I share you concerns about prisons etc in a comment on the Posner side.

You start by noting that there is no statistical relationship.
You then go on with lots of theories as to why large governments will be bad for GDP, including the bold statement that;
"I have no doubt that for various reasons government employees are on average less efficient than private sector workers doing comparable work. as to why government sector employees are less productive."

There are clearly hundreds of other countering theories (such as government employees willing to "go the extra mile" when there entire motive is not profit driven.

Clearly many of these will be bogus too but given that you've referenced the analysis it would be nice if your theories somehow related to the data particularly as you seem so confident in your assertions.

Once again, Beware, of trying to make comparisons between "Apples and Oranges". Then using the comparisons as the basis for further analysis and the drawing of conclusions. Remember, an apple is not an orange and an orange can never be an apple...

Your concern with income inequality is obvious and legitimate but how to correct it. Bringing the upper end down will not necessarilly bring the bottom up and vis-a vis. We saw that with attempts to get everyone owning a house. We will see it again trying to get everyone a college degree and equal health care. Basic equality OF OPPORTUNITY yes, but beyond that, impossible and destructive. Where was the government when the fat cats were running the economy into the ground. No one said boo. It all says something about changing basic principles cautiously. And now the same idiots who got us into this mess are going to get us out?

Jim.... there are means that served us, and those of the topmost tiers well in the past:

1. Work rules implemented during the New Deal.

2. Collective bargaining that helps to give working folks who have NO market power individually some bit of market power. We have seen it work.

3. Progressive income tax rates designed to lower soaring income disparities to the advantage of both the highest earners (who depend upon a healthy economy and working folk being able to "go shopping) and those trying to make ends meet.

Consider: 30 years ago "WE" as an aggregate were HALF as productive and about half as "wealthy" but things worked...... including SS contributions dependent upon income disparity ratios of about 30 years ago.

It IS more difficult today, as it was easier to organize former crafts guilds into collective bargaining units than it is to organize retailers and the "cross disciplines" of the "service economy". It's much like trying to organize those who live in the poorest areas........ as they all think they're going to "get out" and thus lack the team spirit to bring up the whole.

"The government when the fat cats" were raiding the henhouse? Well, we (sorta) elected a cabal of ideologues who were opposed to regulation in the first place and enforcement in the second. Gspn, for the most part a talented and devoted economist but one who admits to having overly entrusted "The Market" to "fix all".

And indeed, an easy mistake to make; one MIGHT think, for example those temporarily at the helm of an S&P or Moody's with a rep built up over nearly a century would act in a manner respectful and protective of that reputation. But no........ they hollowed out ever rating operation and virtually every "non-bank" they could and lit out for the extra mansions and compounds their ill-gained lucre could buy.

I guess we have to relearn NOT to trust the foxes with the henhouse every 80 years or so? At the cost of this lesson.......... I'd hope it would last longer, but it appears that those working away in the rubble have little time or stomach even to make the needed reforms, much less properly enforce them. Could lose what was America if we continue to be slow learners.

We saw that with attempts to get everyone owning a house. We will see it again trying to get everyone a college degree and equal health care. Basic equality OF OPPORTUNITY yes, but beyond that, impossible and destructive. Where was the government when the fat cats were running the economy into the ground. No one said boo.At all was a very interesting and informative topic article

John, And so... due to a lack of imagination and will we shall create a permanent underclass of those who are deprived of the OPPORTUNITY (which requires education, a proper diet, and good health among other things) to bootstrap themselves out of the permanent underclass. Is this what America is really all about or has it just become this as of late?

NEH Change. I've talked with some recent econ grads of good schools not thought to be "Chi school" and it's "THE market" as god, which wouldn't be quite so bad WERE equality of opportunity more the case.

Back when I studied econ, the opening lines were something like determining what would be produced, for whom, and at what price. It seemed the objective was that of harnessing the power of capitalism for the benefit of THE people with the direction set by a functioning democracy.

You know like THE people deciding that ALL should enjoy most of the benefits of modern H/C as a philosophical choice (which in some sense we have done) and then deciding how best to provide it. As President Clinton said, way back when H/C was eating only 13% of GDP and leaving 30 million uncovered "The worst thing we can do is keep doing what we're doing". I agree, as we, like 30 other nations are "rich enough" to decide that no one should go w/o H/C and that we can and would want to spread the costs of major medical events across a broad pool rather than see a few bankrupted. What better pool than ALL so we avoid the massive costs of "who's covered and for what".

There was a discussion in econ class one day, back when Japan was playing "China" and threatening to "out do" the US, with the Prof asking if we thought because they worked harder for less, should we do the same? with the conclusion finally getting around to "probably not". Probably right, as things changed in Japan and American working folk were rewarded with stagnant wages since...... like the Soviet comment of "They pretend to pay us and we pretend to work".

John there were many saying "boo" but those not drowned out by the roaring good times of frothy corruption were dismissed as "lefties" who'd choke a fine economy into an early grave via "too much regulation". The problem was not that of "to get everyone owning a house" but rampant corruption with wholesale disregard for banking practices, "lending" at 30 times assets, and paying the major bond raters to bless the resulting junk with their seal of approval.

One question is WHAT were the banksters doing when builders came in claiming a sale when in truth it was a sham "sale" to an "investor" expecting to "flip" into the same market as the builder? Ha! I met folks along the way who were getting "rich" by being too dumb to know they were in the surf at the top of the wave, but like most Ponzi's things didn't turn out well at all for the mostly hardworking builders and other lower echelon players, and GREAT for those whose names we know, and know where they bought their "retirement" compounds.

I tend to agree with you on the "all college degree" as we'll still need about the same proportion of cab drivers, plumbers, etc though it appears that grocery checkers are disappearing to be replaced by "US" with the exception of myself who plans never to do my own check-out ever, if possible.

Jack, Interesting that you should raise the specter that a portion of our Economic Crisis and problems should be laid at the feet of Academia. Be it Schools of Business, Economics or Professional Business Admin. Programs. There's talk circulating about just this problem. Not that the "Chicago School" was involved in it. As "hearsay" I heard from another source that Uncle Milty once said before his death, "If I'd known what it would have come to, I probably wouldn't have pushed it so hard". Pretty much says it all. ;)

NEH one of the subjects interviewed was about to grad. from UCLA....... while at another event the subject of Ron Paul, something of an item for some young folk, came up and there seemed little agreement as to whether he had ....... the magic elixir or was more than a bit batty or which was the batty part.

And you've likely encountered a fair amount of the 180 degree out of sync litany of "wealthy job creators" investing when their feathers are properly smoothed, out of the goodness of their hearts, where no demand exists that has become ingrained as urban mythology. W/O it seems, any knowledge that the success of McD's, Walmart, Starbucks and others, being that of carefully identifying, and testing, demand and putting each new store where demographics and traffic patterns would assure success, and we've seen what lack of demand has done to Starbucks.

Jack, As for the wealthy and super wealthy "Top Out of Sighters" it's not the issue of "Wealth" per se, but the issue of Power and Control that's important. Armed with that knowledge, one can see how our current Socio-Political landscape has been colored and perverted in some cases.

....... perhaps I'm wrong, but suppose it came down to one Billion-plus/year hedge fund scammer vs 25,000 teachers earning $40,000 (higher than the national average) does anyone think the hedge fund scammer carving off his billions with thousands of trades a minute is adding as much value as the 25,000 teachers? Or that "market price discovery" is enhance accordingly? with stable markets?

...... Wait! suppose that (as could well be the case) a LOT of young women opted to skip taking the vow of relative poverty offered most of our teachers in favor of the more lucrative WS scamming or even that of joining the ever increasing ranks of DC lobbyists, would our nation be better off? Productivity increased?

Jack, Yep. It's the dichotomy that exists. On the one side of the coin, there's the "Public Value" and the other "Private Value". As an ancient Roman once put it, "The reason Rome is great, is that the true Roman believes in Public Magnificence and Private austerity". Something we could do well too learn today...

Dermatologists feel that constant pressure on the skin can lead to acne breakouts. The 8 hours you spend everynight sleeping with your face pressed against a conventional pillow is certainly applying constant pressure to your facial skin. There are now pillows specifically designed to minimize pressure to your face as you sleep. The MyFacePillow is one such pillow. For more information visit http://www.myfacepillow.com/.